Posted by Canadian Dream on February 24, 2009
A long time commenter on this blog, Canadian Money, as been bugging me for a bit to do this post. You can see CM’s original comment here.
Buy and hold is a old concept, but most recently made more mainstream following Derek Foster’s book, Stop Working (see my review) where he called it ‘buy and never selling’. The idea is somewhat simple. If you don’t sell stocks you can’t be taxed on your capital gains if you hold it in a taxable account (or you don’t lock in your losses until you sell). The entire approach sort of admits you can’t time the market so why try. Instead the approach relies on dollar cost averaging and the fact eventually the market will keep going up and replace any losses you had during down times.
Overall it sounds good, so like most fallacies it falls apart under unusual events. You see most items like this are created when people start to believe there are some overall trends to the market after a period of time and therefore you can predict it. So you get statements like over the long term stocks out preform bonds. Yes that is generally true in history, but the prediction is never quiet right. It’s sort of like weather forecasting, it’s an educated guess of what’s going to happen with lots of data backing the decision, but in the end it is still just a guess.
The problem with the belief of buy and hold is the timing and length of recovery. For example after 1929 it took until about 1955 for the market to recover (I’m using the DJIA as a backdrop for this discussion) or 26 year. Then from 1965 until about 1982 the market just stayed in a rut and didn’t hit any new highs for that period of 17 years (see CM’s post for the chart). In both cases waiting for the stock market to recovery when you are in your retirement may not have been an option, you may have required some of that money that is tied into the stock market and therefore never saw the recovery.
With buying into buy and hold people end up having too much faith in the market. In 2008/2009 many baby boomers are praying for a recovery to let them retire. The fact the recovery may take decades I don’t think has sunken in yet. The recovery may very well be a long time in the making, so yes buy and hold will work if you can wait long enough. The issue with retirement savings is you can’t always wait that long if you are living on that money (or expecting to be living on it soon).
Even Derek Foster saw the light and admitted in his second book that he sold certain stocks and buy others. Why? Because the situation you buy a stock in can change and if it changes enough it is completely alright to sell it. The how and why of that will depend on you and your situation.
So in the end, buy and hold does work if you have decades in front of you, like in your twenties. Yet in your fourties or fifties, the shine on the idea has worn off because the associated risks to your retirement lifestyle. The end of the lesson from this bear market is don’t take more risks than you need because you are greedy. You can get burned.
So what are your thoughts on buy and hold? Do you use it, if so, why?
Posted by Canadian Dream on February 23, 2009
So it’s time again. The ads are full of people buying RRSP’s, have you got yours yet? Gods I dislike this season for pushing people to invest. I mean why can’t people just do it all year long? Yet the ads did give me an idea.
So the idea is based on if you intend to work a bit in retirement. Would it be useful to contribute a lot of money to an RRSP just prior to shifting to part time work? The idea would be to not actually claim some of the deductions in the year you made it but rather carry it forward to reduce your taxable income once you are semi retired to hopefully reduce your tax bill during your first few years while you are adjusting.
In some respects the idea is not a bad one, especially depending if you are going to be doing retirement work which has a highly variable income and you have tax concerns. On the other hand the deductions might be worth more to you to claim on your high income years and just pay your lower income tax rate once you go to part time.
So in general my thoughts are this could be a useful idea depending on your particular situation and concerns. On the other hand it might just be easier to claim the deduction prior to going part time and then if you have extra cash from work you can contribute at that time.
So what are your thoughts? Is this a half baked idea and not worth the complication or could it be useful?
Posted by Canadian Dream on February 20, 2009
So after all the ‘excitement’ over Obama’s visit to Canada some people may wonder what exacting is a clean energy dialogue? After all the media seem to go on and on about it so it must be important, right?
Well sadly it is nothing more than “have your people talk to my people on Carbon Capture and Storage (CCS) and smart grids.” That’s about it. It’s a discussion, some media were calling it a ‘clean energy pact’, when it’s not even a pact, it’s a conversation right now. There is no new money on our side or anything significant at this point. What did you expect in a few hours of conversation?
Yet from my point of view it seems rather silly to have Harper stand up there and say the reason we have failed to reduce or even slow our green house gas emissions was all because of Bush. We couldn’t possibly do anything until America signed on. Pardon?!?! Did he just try to rewrite history in one day!
The reason nothing was done was both the Conservatives and the Liberals have done nothing since negotiating Kyoto to try and hit the target other than volunteer programs and some wasteful spending on stupid projects that didn’t help (ie: mass transit tax credit). Of course none of those work, they rarely do. Actually they did the opposite by stirring up US interest in the oil/tar sands. Frankly Canada’s big problem has been an unwillingness to deal with the issue in a rational conversation.
So here’s my two cents on the conversation we need to have:
- Environmentalists need to get past talking about meeting Kyoto. Frankly it’s a waste of time because unless suddenly our population drops by 10% and economy shrinks by 20% it will NEVER happen. There are two many failures leading up the the deadline of 2012 to actually do anything now. The best we can hope for is to start stabilizing things and start the path to reductions now.
- Business needs to accept business as usual won’t continue. They have desperately tried to avoid regulations or taxes for years complaining about the costs involved. Well guess what by pushing it off for the last 20 years you have managed to make the costs much worse. You could have accepted something earlier, but you refused to accept you might have another limit on your business plans.
- Environmentalists need to start giving ground on some things. All renewable power generation won’t happen tomorrow there is a massive infrastructure shift that needs to occur first. Also people won’t be willing to do massive scale backs on their lives. So guess what that means looking at nuclear and/or CCS technologies for a long while until things get sorted out (if ever) for an all renewable system.
- Business will need to accept there will be losers. Everyone keeps wanting to have a system where no one loses but this is ridiculous, of course there will be losers. If you have a high carbon footprint you have know for the last 20 years that it could have a negative impact on your business in the future. You took that risk and lost. Move on.
In general Canada collectively has to get past blaming each other. We all screwed up. The government didn’t do anything, the people didn’t demand something be done (well until recently) and business looked after it’s bottom line as per usual. It’s over now, let’s sit down and actually make a plan that could work over decades because that is the only way things will change.
